Management's Report on Internal Control over Financial Reporting

The consolidated financial statements and Management's Discussion and Analysis (MD&A) included in this Annual Report are the responsibility of the management of TransCanada Corporation (TransCanada or the Company) and have been approved by the Board of Directors of the Company. The consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles (GAAP) and include amounts that are based on estimates and judgments. The MD&A is based on the Company's financial results. It compares the Company's financial and operating performance in 2017 to that in 2016, and highlights significant changes between 2016 and 2015. The MD&A should be read in conjunction with the consolidated financial statements and accompanying notes. Financial information contained elsewhere in this Annual Report is consistent with the consolidated financial statements.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has designed and maintains a system of internal control over financial reporting, including a program of internal audits to carry out its responsibility. Management believes these controls provide reasonable assurance that financial records are reliable and form a proper basis for the preparation of financial statements. The internal control over financial reporting include management's communication to employees of policies that govern ethical business conduct.

Under the supervision and with the participation of the President and Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management concluded, based on its evaluation, that internal control over financial reporting was effective as of December 31, 2017, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes.

The Board of Directors is responsible for reviewing and approving the financial statements and MD&A and ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board of Directors carries out these responsibilities primarily through the Audit Committee, which consists of independent, non-management directors. The Audit Committee meets with management at least five times a year and meets independently with internal and external auditors and as a group to review any significant accounting, internal control and auditing matters in accordance with the terms of the Charter of the Audit Committee, which is set out in the Annual Information Form. The Audit Committee's responsibilities include overseeing management's performance in carrying out its financial reporting responsibilities and reviewing the Annual Report, including the consolidated financial statements and MD&A, before these documents are submitted to the Board of Directors for approval. The internal and independent external auditors have access to the Audit Committee without the requirement to obtain prior management approval.

The Audit Committee approves the terms of engagement of the independent external auditors and reviews the annual audit plan, the Auditors' Report and the results of the audit. It also recommends to the Board of Directors the firm of external auditors to be appointed by the shareholders.

The shareholders have appointed KPMG LLP as independent external auditors to express an opinion as to whether the consolidated financial statements present fairly, in all material respects, the Company's consolidated financial position, results of operations and cash flows in accordance with GAAP. The reports of KPMG LLP outline the scope of its examinations and its opinions on the consolidated financial statements and the effectiveness of the Company's internal control over financial reporting.

Russell K. Girling President and Chief Executive Officer	Donald R. Marchand Executive Vice-President and Chief Financial Officer
February 14, 2018

TransCanada Consolidated financial statements 2017 109

Independent Auditors' Report of Registered Public Accounting Firm

To the Shareholders and the Board of Directors of TransCanada Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of TransCanada Corporation (the "Company") as of December 31, 2017, and 2016, the related consolidated statements of income, comprehensive income, cash flows and equity for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and 2016, and its financial performance and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

Report on Internal Control over Financial Reporting

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 14, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB and in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 1956.

Chartered Professional Accountants

Calgary, Canada

February 14, 2018

110  TransCanada Consolidated financial statements 2017

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of TransCanada Corporation

Opinion on Internal Control over Financial Reporting

We have audited TransCanada Corporation’s internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

Report on the Financial Statements

We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016 the related consolidated statements of income, comprehensive income, cash flows and equity for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements") and our report dated February 14, 2018 expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB and in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Chartered Professional Accountants

Calgary, Canada

February 14, 2018

TransCanada Consolidated financial statements 2017 111

Consolidated statement of income

year ended December 31	2017			2016			2015
(millions of Canadian $, except per share amounts)
Revenues
Canadian Natural Gas Pipelines	3,693			3,682			3,680
U.S. Natural Gas Pipelines	3,584			2,526			1,444
Mexico Natural Gas Pipelines	570			378			259
Liquids Pipelines	2,009			1,755			1,879
Energy	3,593			4,206			4,091
	13,449			12,547			11,353
Income from Equity Investments (Note 9)	773			514			440
Operating and Other Expenses
Plant operating costs and other	3,906			3,861			3,303
Commodity purchases resold	2,382			2,172			2,237
Property taxes	569			555			517
Depreciation and amortization	2,055			1,939			1,765
Goodwill and other asset impairment charges (Notes 8, 11 and 12)	1,257			1,388			3,745
	10,169			9,915			11,567
Gain/(Loss) on Assets Held for Sale/Sold (Notes 6 and 26)	631			(833		)	(125		)
Financial Charges
Interest expense (Note 17)	2,069			1,998			1,370
Allowance for funds used during construction	(507		)	(419		)	(295		)
Interest income and other	(184		)	(103		)	132
	1,378			1,476			1,207
Income/(Loss) before Income Taxes	3,306			837			(1,106		)
Income Tax (Recovery)/Expense(Note 16)
Current	149			156			136
Deferred	566			196			(102		)
Deferred – U.S. Tax Reform	(804		)	—			—
	(89		)	352			34
Net Income/(Loss)	3,395			485			(1,140		)
Net income attributable to non-controlling interests (Note 19)	238			252			6
Net Income/(Loss) Attributable to Controlling Interests	3,157			233			(1,146		)
Preferred share dividends	160			109			94
Net Income/(Loss) Attributable to Common Shares	2,997			124			(1,240		)
Net Income/(Loss) per Common Share(Note 20)
Basic		$3.44			$0.16			($1.75	)
Diluted		$3.43			$0.16			($1.75	)
Dividends Declared per Common Share		$2.50			$2.26			$2.08
Weighted Average Number of Common Shares (millions)(Note 20)
Basic	872			759			709
Diluted	874			760			709

The accompanying Notes to the consolidated financial statements are an integral part of these statements.

112  TransCanada Consolidated financial statements 2017

Consolidated statement of comprehensive income

year ended December 31	2017		2016		2015
(millions of Canadian $)
Net Income/(Loss)	3,395		485		(1,140	)
Other Comprehensive (Loss)/Income, Net of Income Taxes
Foreign currency translation losses and gains on net investment in foreign operations	(749	)	3		813
Reclassification of foreign currency translation gains on net investment on disposal of foreign operations	(77	)	—		—
Change in fair value of net investment hedges	—		(10	)	(372	)
Change in fair value of cash flow hedges	3		30		(57	)
Reclassification to net income of gains and losses on cash flow hedges	(2	)	42		88
Unrealized actuarial gains and losses on pension and other post-retirement benefit plans	(11	)	(26	)	51
Reclassification of actuarial loss and prior service costs on pension and other post-retirement benefit plans	16		16		32
Other comprehensive (loss)/income on equity investments	(106	)	(87	)	47
Other comprehensive (loss)/income (Note 22)	(926	)	(32	)	602
Comprehensive Income/(Loss)	2,469		453		(538	)
Comprehensive income attributable to non-controlling interests	83		241		312
Comprehensive Income/(Loss) Attributable to Controlling Interests	2,386		212		(850	)
Preferred share dividends	160		109		94
Comprehensive Income/(Loss) Attributable to Common Shares	2,226		103		(944	)

The accompanying Notes to the consolidated financial statements are an integral part of these statements.

TransCanada Consolidated financial statements 2017 113

Consolidated statement of cash flows

year ended December 31	2017		2016		2015
(millions of Canadian $)
Cash Generated from Operations
Net income/(loss)	3,395		485		(1,140	)
Depreciation and amortization	2,055		1,939		1,765
Goodwill and other asset impairment charges (Notes 8, 11 and 12)	1,257		1,388		3,745
Deferred income taxes (Note 16)	566		196		(102	)
Deferred income taxes – U.S. Tax Reform (Note 16)	(804	)	—		—
Income from equity investments (Note 9)	(773	)	(514	)	(440	)
Distributions received from operating activities of equity investments (Note 9)	970		844		793
Employee post-retirement benefits funding, net of expense (Note 23)	(64	)	(3	)	44
(Gain)/loss on assets held for sale/sold (Notes 6 and 26)	(631	)	833		125
Equity allowance for funds used during construction	(362	)	(253	)	(165	)
Unrealized (gains)/losses on financial instruments	(149	)	(149	)	58
Other	43		55		47
(Increase)/decrease in operating working capital (Note 25)	(273	)	248		(346	)
Net cash provided by operations	5,230		5,069		4,384
Investing Activities
Capital expenditures (Note 4)	(7,383	)	(5,007	)	(3,918	)
Capital projects in development (Note 4)	(146	)	(295	)	(511	)
Contributions to equity investments (Notes 4 and 9)	(1,681	)	(765	)	(493	)
Acquisitions, net of cash acquired	—		(13,608	)	(236	)
Proceeds from sale of assets, net of transaction costs	5,317		6		—
Other distributions from equity investments (Note 9)	362		727		9
Deferred amounts and other	(168	)	159		270
Net cash used in investing activities	(3,699	)	(18,783	)	(4,879	)
Financing Activities
Notes payable issued/(repaid), net	1,038		(329	)	(1,382	)
Long-term debt issued, net of issue costs	3,643		12,333		5,045
Long-term debt repaid	(7,085	)	(7,153	)	(2,105	)
Junior subordinated notes issued, net of issue costs	3,468		1,549		917
Dividends on common shares	(1,339	)	(1,436	)	(1,446	)
Dividends on preferred shares	(155	)	(100	)	(92	)
Distributions paid to non-controlling interests	(283	)	(279	)	(224	)
Common shares issued, net of issue costs	274		7,747		27
Common shares repurchased (Note 20)	—		(14	)	(294	)
Preferred shares issued, net of issue costs	—		1,474		243
Partnership units of TC PipeLines, LP issued, net of issue costs	225		215		55
Common units of Columbia Pipeline Partners LP acquired	(1,205	)	—		—
Net cash (used in)/provided by financing activities	(1,419	)	14,007		744
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents	(39	)	(127	)	112
Increase in Cash and Cash Equivalents	73		166		361
Cash and Cash Equivalents
Beginning of year	1,016		850		489
Cash and Cash Equivalents
End of year	1,089		1,016		850

The accompanying Notes to the consolidated financial statements are an integral part of these statements.

114  TransCanada Consolidated financial statements 2017

Consolidated balance sheet

at December 31		2017		2016
(millions of Canadian $)
ASSETS
Current Assets
Cash and cash equivalents		1,089		1,016
Accounts receivable		2,522		2,075
Inventories		378		368
Assets held for sale		—		3,717
Other (Note 7)		691		908
		4,680		8,084
Plant, Property and Equipment (Note 8)		57,277		54,475
Equity Investments(Note 9)		6,366		6,544
Regulatory Assets (Note 10)		1,376		1,322
Goodwill(Note 11)		13,084		13,958
Loan Receivable from Affiliate (Note 9)		919		—
Intangible and Other Assets (Note 12)		1,484		3,026
Restricted Investments		915		642
		86,101		88,051
LIABILITIES
Current Liabilities
Notes payable (Note 13)		1,763		774
Accounts payable and other (Note 14)		4,057		3,861
Dividends payable		586		526
Accrued interest		605		595
Liabilities related to assets held for sale		—		86
Current portion of long-term debt (Note 17)		2,866		1,838
		9,877		7,680
Regulatory Liabilities (Note 10)		4,321		2,121
Other Long-Term Liabilities (Note 15)		727		1,183
Deferred Income Tax Liabilities (Note 16)		5,403		7,662
Long-Term Debt (Note 17)		31,875		38,312
Junior Subordinated Notes (Note 18)		7,007		3,931
		59,210		60,889
Common Units Subject to Rescission or Redemption (Note 19)		—		1,179
EQUITY
Common shares, no par value (Note 20)		21,167		20,099
Issued and outstanding:	December 31, 2017 – 881 million shares
	December 31, 2016 – 864 million shares
Preferred shares (Note 21)		3,980		3,980
Additional paid-in capital		—		—
Retained earnings		1,623		1,138
Accumulated other comprehensive loss (Note 22)		(1,731	)	(960	)
Controlling Interests		25,039		24,257
Non-controlling interests (Note 19)		1,852		1,726
		26,891		25,983
		86,101		88,051

Commitments, Contingencies and Guarantees(Note 27)

Corporate Restructuring Costs (Note 28)

Variable Interest Entities(Note 29)

The accompanying Notes to the consolidated financial statements are an integral part of these statements.

On behalf of the Board:

Russell K. Girling Director	John E. Lowe Director

TransCanada Consolidated financial statements 2017 115

Consolidated statement of equity

year ended December 31	2017		2016		2015
(millions of Canadian $)
Common Shares (Note 20)
Balance at beginning of year	20,099		12,102		12,202
Shares issued:
Under public offerings, net of issue costs	—		7,752		—
Under dividend reinvestment and share purchase plan	790		177		—
Under at-the-market equity issuance program, net of issue costs	216		—		—
On exercise of stock options	62		74		30
Shares repurchased	—		(6	)	(130	)
Balance at end of year	21,167		20,099		12,102
Preferred Shares
Balance at beginning of year	3,980		2,499		2,255
Shares issued under public offerings, net of issue costs	—		1,481		244
Balance at end of year	3,980		3,980		2,499
Additional Paid-In Capital
Balance at beginning of year	—		7		370
Issuance of stock options, net of exercises	6		6		8
Dilution from TC PipeLines, LP units issued	26		24		6
Common shares repurchased (Note 20)	—		(8	)	(164	)
Asset drop downs to TC PipeLines, LP	(202	)	(38	)	(213	)
Columbia Pipeline Partners LP acquisition	(171	)	—		—
Reclassification of additional paid-in capital deficit to retained earnings	341		9		—
Balance at end of year	—		—		7
Retained Earnings
Balance at beginning of year	1,138		2,769		5,478
Net income/(loss) attributable to controlling interests	3,157		233		(1,146	)
Common share dividends	(2,184	)	(1,733	)	(1,471	)
Preferred share dividends	(159	)	(122	)	(92	)
Adjustment related to employee share-based payments (Note 3)	12		—		—
Reclassification of additional paid-in capital deficit to retained earnings	(341	)	(9	)	—
Balance at end of year	1,623		1,138		2,769
Accumulated Other Comprehensive Loss
Balance at beginning of year	(960	)	(939	)	(1,235	)
Other comprehensive (loss)/income attributable to controlling interests (Note 22)	(771	)	(21	)	296
Balance at end of year	(1,731	)	(960	)	(939	)
Equity Attributable to Controlling Interests	25,039		24,257		16,438
Equity Attributable to Non-Controlling Interests
Balance at beginning of year	1,726		1,717		1,583
Acquisition of non-controlling interests in Columbia Pipeline Partners LP	—		1,051		—
Net income attributable to non-controlling interests	238		252		6
Other comprehensive (loss)/income attributable to non-controlling interests	(155	)	(11	)	306
Issuance of TC PipeLines, LP units
Proceeds, net of issue costs	225		215		55
Decrease in TransCanada's ownership of TC PipeLines, LP	(41	)	(40	)	(11	)
Reclassification from/(to) common units subject to rescission or redemption (Note 19)	106		(1,179	)	—
Distributions declared to non-controlling interests	(280	)	(279	)	(222	)
Impact of Columbia Pipeline Partners LP acquisition	33		—		—
Balance at end of year	1,852		1,726		1,717
Total Equity	26,891		25,983		18,155

The accompanying Notes to the consolidated financial statements are an integral part of these statements.

116  TransCanada Consolidated financial statements 2017

Notes to consolidated financial statements

1.DESCRIPTION OF TRANSCANADA'S BUSINESS

TransCanada Corporation (TransCanada or the Company) is a leading North American energy infrastructure company which operates in five business segments, Canadian Natural Gas Pipelines, U.S. Natural Gas Pipelines, Mexico Natural Gas Pipelines, Liquids Pipelines and Energy, each of which offers different products and services. The Company also has a Corporate segment which is non-operational, consisting of corporate and administrative functions.

Canadian Natural Gas Pipelines

The Canadian Natural Gas Pipelines segment consists of the Company's investments in 40,429 km (25,121 miles) of regulated natural gas pipelines.

U.S. Natural Gas Pipelines

The U.S. Natural Gas Pipelines segment consists of the Company's investments in 49,779 km (30,931 miles) of regulated natural gas pipelines, 535 Bcf of regulated natural gas storage facilities, midstream and other assets.

Mexico Natural Gas Pipelines

The Mexico Natural Gas Pipelines segment consists of the Company's investments in 1,680 km (1,044 miles) of regulated natural gas pipelines.

Liquids Pipelines

The Liquids Pipelines segment consists of the Company's investments in 4,874 km (3,030 miles) of crude oil pipeline systems which connect Alberta and U.S. crude oil supplies to U.S. refining markets in Illinois, Oklahoma and Texas.

Energy

The Energy segment primarily consists of the Company's investments in 11 power generation facilities and 118 Bcf of non-regulated natural gas storage facilities. These include assets in Alberta, Ontario, Québec, New Brunswick and Arizona.

2.  ACCOUNTING POLICIES

The Company's consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles (GAAP). Amounts are stated in Canadian dollars unless otherwise indicated.

Basis of Presentation

These consolidated financial statements include the accounts of TransCanada and its subsidiaries. The Company consolidates variable interest entities (VIEs) for which it is considered to be the primary beneficiary as well as voting interest entities in which it has a controlling financial interest. To the extent there are interests owned by other parties, these interests are included in non-controlling interests. TransCanada uses the equity method of accounting for joint ventures in which the Company is able to exercise joint control and for investments in which the Company is able to exercise significant influence. TransCanada records its proportionate share of undivided interests in certain assets. Certain prior year amounts have been reclassified to conform to current year presentation.

TransCanada Consolidated financial statements 2017 117

Use of Estimates and Judgments

In preparing these consolidated financial statements, TransCanada is required to make estimates and assumptions that affect both the amount and timing of recording assets, liabilities, revenues and expenses since the determination of these items may be dependent on future events. The Company uses the most current information available and exercises careful judgment in making these estimates and assumptions. Significant estimates and judgments used in the preparation of the consolidated financial statements include, but are not limited to:

• fair value of assets and liabilities acquired in a business combination (Note 5)

• fair value and depreciation rates of plant, property and equipment (Note 8)

• carrying value of regulatory assets and liabilities (Note 10)

• fair value of goodwill (Note 11)

• fair value of intangible assets (Note 12)

• carrying value of asset retirement obligations (Note 15)

• provisions for income taxes, including U.S. Tax Reform (Note 16)

• assumptions used to measure retirement and other post-retirement obligations (Note 23)

• fair value of financial instruments (Note 24) and

• provision for commitments, contingencies, guarantees (Note 27) and restructuring costs (Note 28).

Actual results could differ from these estimates.

Regulation

Certain Canadian, U.S. and Mexico natural gas pipeline and storage assets are regulated with respect to construction, operations and the determination of tolls. In Canada, regulated natural gas pipelines and liquids pipelines are subject to the authority of the National Energy Board (NEB) or the Alberta Energy Regulator (AER). In the U.S., regulated natural gas pipelines, liquids pipelines and regulated natural gas storage assets are subject to the authority of the Federal Energy Regulatory Commission (FERC). In Mexico, regulated natural gas pipelines are subject to the authority of the Energy Regulatory Commission (CRE).Rate-regulatedaccounting (RRA) standards may impact the timing of the recognition of certain revenues and expenses in TransCanada's rate-regulated businesses which may differ from that otherwise recognized in non-rate-regulated businesses to appropriately reflect the economic impact of the regulators' decisions regarding revenues and tolls. TransCanada's businesses that apply RRA currently include Canadian, U.S. and Mexico natural gas pipelines, and regulated U.S. natural gas storage. RRA is not applicable to liquids pipelines as the regulators' decisions regarding operations and tolls on those systems generally do not have an impact on timing of recognition of revenues and expenses.

Revenue Recognition

Natural Gas Pipelines and Liquids Pipelines

Capacity Arrangements and Transportation

Revenues from the Company's natural gas and liquids pipelines are generated from contractual arrangements for committed capacity and from the transportation of natural gas or crude oil. Revenues earned from firm contracted capacity arrangements are recognized ratably over the contract period regardless of the amount of natural gas or crude oil that is transported. Transportation revenues for interruptible or volumetric-based services are recognized when physical deliveries of natural gas or crude oil are made.

Revenues from Canadian natural gas pipelines subject to RRA are recognized in accordance with decisions made by the NEB. The Company's Canadian natural gas pipeline tolls are based on revenue requirements designed to recover the costs of providing natural gas transportation services, which include a return of and return on capital, as approved by the NEB. The Company's Canadian natural gas pipelines generally are not subject to risks related to variances in revenues and most costs. These variances are generally subject to deferral treatment and are recovered or refunded in future rates. The Company's Canadian natural gas pipelines, at times, are subject to incentive mechanisms, as negotiated with shippers and approved by the NEB. These mechanisms can result in the Company recognizing more or less revenue than required to recover the costs that are subject to incentives. Revenues on firm contracted capacity are recognized ratably over the contract period. Revenues from interruptible or volumetric-based services are recorded when physical delivery is made. Revenues recognized prior to an NEB decision on rates for that period reflect the NEB's last approved rate of return on common equity (ROE) assumptions. Adjustments to revenues are recorded when the NEB decision is received.

118  TransCanada Consolidated financial statements 2017

The Company's U.S. natural gas pipelines are subject to FERC regulations and, as a result, revenues collected may be subject to refund during a rate proceeding. Allowances for these potential refunds are recognized using management's best estimate based on the facts and circumstances of the proceeding. Any allowances that are recognized during the proceeding process are refunded or retained at the time a regulatory decision becomes final.

Revenues from the Company's Mexico natural gas pipelines are primarily collected based on CRE-approved negotiated firm capacity contracts and recognized ratably over the contract period. Other volumes shipped on these pipelines are subject to CRE-approved tariffs.

The Company does not take ownership of the natural gas that it transports for its customers.

Regulated Natural Gas Storage

Revenues from the Company's regulated natural gas storage services are recognized either ratably over the contract period for firm committed capacity regardless of the amount of natural gas that is stored, or when gas is injected or withdrawn for interruptible or volumetric-based services. The Company does not take ownership of the natural gas that it stores for its customers.

Midstream and Other

Revenues from the Company's midstream natural gas services, including gathering, treating, conditioning, processing, compression and liquids handling services, are generated from contractual arrangements and are recognized ratably over the contract period regardless of the amount of natural gas that is subject to these services. The Company also owns mineral rights associated with certain storage facilities. These mineral rights can be leased or contributed to producers of natural gas in return for a royalty interest. Royalties from mineral interests are recognized when commodities are produced.

Energy

Power Generation

Revenues from the Company's Energy business are primarily derived from the sale of electricity, which is recorded at the time of delivery. Revenues also include capacity payments and ancillary services, as well as gains and losses resulting from the use of commodity derivative contracts. The accounting for derivative contracts is described in the Derivative instruments and hedging activities policy in this note.

Non-Regulated Natural Gas Storage

Revenues earned from providing non-regulated natural gas storage services are recognized in accordance with the terms of the natural gas storage contracts, which is generally over the term of the contract. Revenues earned on the sale of proprietary natural gas are recorded net of the cost of the proprietary natural gas in the month of delivery. Derivative contracts for the purchase or sale of natural gas are recorded at fair value with changes in fair value recorded in Revenues.

Cash and Cash Equivalents

The Company's Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of three months or less and are recorded at cost, which approximates fair value.

Inventories

Inventories primarily consist of natural gas inventory in storage, crude oil in transit, materials and supplies including spare parts and fuel. Inventories are carried at the lower of cost and net realizable value.

Assets Held For Sale

The Company classifies assets as held for sale when management approves and commits to a formal plan to actively market a disposal group and expects the sale to close within the next twelve months. Upon classifying an asset as held for sale, the asset is recorded at the lower of its carrying amount or its estimated fair value, net of selling costs, and any losses are recognized in net income. Depreciation expense is no longer recorded once an asset is classified as held for sale.

TransCanada Consolidated financial statements 2017 119

Plant, Property and Equipment

Natural Gas Pipelines

Plant, property and equipment for natural gas pipelines is carried at cost. Depreciation is calculated on a straight-line basis once the assets are ready for their intended use. Pipeline and compression equipment are depreciated at annual rates ranging from one per cent to six per cent, and metering and other plant equipment are depreciated at various rates reflecting their estimated useful lives. The cost of major overhauls of equipment is capitalized and depreciated over the estimated service lives of the overhauls. The cost of regulated natural gas pipelines includes an allowance for funds used during construction (AFUDC) consisting of a debt component and an equity component based on the rate of return on rate base approved by regulators. AFUDC is reflected as an increase in the cost of the assets in plant, property and equipment with a corresponding credit recognized in Allowance for funds used during construction in the Consolidated statement of income. The equity component of AFUDC is a non-cash expenditure. Interest is capitalized during construction of non-regulated natural gas pipelines.

Regulated natural gas storage base gas, which is valued at cost, represents gas volumes that are maintained to ensure adequate reservoir pressure exists to deliver natural gas held in storage. Base gas is not depreciated.

When regulated natural gas pipelines retire plant, property and equipment from service, the original book cost is removed from the gross plant amount and recorded as a reduction to accumulated depreciation. Costs incurred to remove a plant, property and equipment from service, net of any salvage proceeds, are also recorded in accumulated depreciation.

Midstream and Other

Plant, property and equipment for midstream assets is carried at cost. Depreciation is calculated on a straight-line basis once the assets are ready for their intended use. Gathering and processing facilities are depreciated at annual rates ranging from

1.7 per cent to 2.5 per cent, and other plant and equipment are depreciated at various rates. When these assets are retired from plant, property and equipment, the original book cost and related accumulated depreciation are derecognized and any gain or loss is recorded in net income.

The Company participates as a working interest partner in the development of certain Marcellus and Utica acreage. The working interest allows the Company to invest in drilling activities in addition to receiving a royalty interest in well production. The Company uses the successful efforts method of accounting for natural gas and crude oil resulting from its portion of drilling activities. Capitalized well costs are depleted based on the units of production method.

Liquids Pipelines

Plant, property and equipment for liquids pipelines is carried at cost. Depreciation is calculated on a straight-line basis once the assets are ready for their intended use. Pipeline and pumping equipment are depreciated at annual rates ranging from two per cent to 2.5 per cent, and other plant and equipment are depreciated at various rates. The cost of these assets includes interest capitalized during construction. When liquids pipelines retire plant, property and equipment from service, the original book cost and related accumulated depreciation are derecognized and any gain or loss is recorded in net income.

Energy

Plant, property and equipment for Energy assets are recorded at cost and, once the assets are ready for their intended use, depreciated by major component on a straight-line basis over their estimated service lives at average annual rates ranging from two per cent to 20 per cent. Other equipment is depreciated at various rates. The cost of major overhauls of equipment is capitalized and depreciated over the estimated service lives of the overhauls. Interest is capitalized on facilities under construction. When these assets are retired from plant, property and equipment, the original book cost and related accumulated depreciation are derecognized and any gain or loss is recorded in net income.

Non-regulated natural gas storage base gas, which is valued at original cost, represents gas volumes that are maintained to ensure adequate reservoir pressure exists to deliver gas held in storage. Base gas is not depreciated.

Corporate

Corporate plant, property and equipment is recorded at cost and depreciated on a straight-line basis over its estimated useful life at average annual rates ranging from three per cent to 20 per cent.

120  TransCanada Consolidated financial statements 2017

Capitalized Project Costs

The Company capitalizes project costs once advancement of the project to a construction stage is probable or costs are otherwise likely to be recoverable. The Company also capitalizes interest costs for non-regulated projects in development and AFUDC for regulated projects in development. Capital projects in development are included in Intangible and other assets on the Consolidated balance sheet. These represent larger projects that generally require regulatory or other approvals before physical construction can begin. Once approvals are received, projects are moved to Plant, property and equipment under construction. When the asset is ready for its intended use and available for operations, capitalized project costs are depreciated in accordance with the Company's plant, property and equipment depreciation policies.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, such as Plant, property and equipment and Intangible assets for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows or the estimated selling price is less than the carrying value of an asset, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the asset.

Acquisitions and Goodwill

The Company accounts for business combinations using the acquisition method of accounting and, accordingly, the assets and liabilities of the acquired entities are primarily measured at their estimated fair values at the date of acquisition. The excess of the fair value of the consideration transferred over the estimated fair value of the net assets acquired is classified as goodwill. Goodwill is not amortized and is tested for impairment on an annual basis or more frequently if events or changes in circumstances indicate that it might be impaired. The annual review for goodwill impairment is performed at the reporting unit level which is one level below the Company's operating segments. The Company can initially assess qualitative factors to determine whether events or changes in circumstances indicate that goodwill might be impaired. If the Company concludes that it is not more likely than not that the fair value of the reporting unit is greater than its carrying value, the first step of a two-step impairment test is performed by comparing the fair value of the reporting unit to its carrying value, which includes goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment is indicated and the second step is performed to measure the amount of the impairment. In the second step, the implied fair value of goodwill is calculated by deducting the recognized amounts of all tangible and intangible net assets of the reporting unit from the fair value determined in the initial assessment. If the carrying value of goodwill exceeds the calculated implied fair value of goodwill, an impairment charge is recorded in an amount equal to the difference. The Company can elect to move directly to the first step of the two-step impairment test for any of its reporting units when performing its annual impairment test.

Loans and Receivables

Loans receivable from affiliates and accounts receivable are measured at cost.

Power Purchase Arrangements

A power purchase arrangement (PPA) is a long-term contract for the purchase or sale of power on a predetermined basis. TransCanada has PPAs for the sale of power that are accounted for as operating leases where TransCanada is the lessor. During 2016, the Company terminated its Alberta PPAs under which it purchased power and recorded an impairment charge. Prior to their termination, substantially all of these PPAs were also accounted for as operating leases, where TransCanada was the lessee, and initial payments to acquire these PPAs were recognized in Intangible and other assets and amortized on a straight-line basis over the term of the contracts. A portion of these PPAs were subleased to third parties under terms and conditions similar to the PPAs, and were also accounted for as operating leases with the margin earned from the subleases recorded in Revenues. Refer to Note 12, Intangible and other assets, for further information.

Restricted Investments

The Company has certain investments that are restricted as to their withdrawal and use. These restricted investments are classified as available for sale and are recorded at fair value on the Consolidated balance sheet.

As a result of the NEB’s Land Matters Consultation Initiative (LMCI), TransCanada is required to collect funds to cover estimated future pipeline abandonment costs for all NEB regulated Canadian pipelines. Funds collected are placed in trusts that hold and invest the funds and are accounted for as restricted investments. LMCI restricted investments may only be used to fund the abandonment of the NEB regulated pipeline facilities; therefore, a corresponding regulatory liability is recorded on the Consolidated balance sheet. The Company also has other restricted investments that have been set aside to fund insurance claim losses to be paid by the Company's wholly-owned captive insurance subsidiary.

TransCanada Consolidated financial statements 2017 121

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred income tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates at the balance sheet date that are anticipated to apply to taxable income in the years in which temporary differences are expected to be reversed or settled. Changes to these balances are recognized in net income in the period during which they occur, except for changes in balances related to regulated natural gas pipelines which are deferred until they are refunded or recovered in tolls, as permitted by the regulator. Deferred income tax assets and liabilities are classified as non-current on the Consolidated balance sheet.

Canadian income taxes are not provided on the unremitted earnings of foreign investments that the Company does not intend to repatriate in the foreseeable future.

Asset Retirement Obligations

The Company recognizes the fair value of a liability for asset retirement obligations (ARO) in the period in which it is incurred, when a legal obligation exists and a reasonable estimate of fair value can be made. The fair value is added to the carrying amount of the associated asset and the liability is accreted through charges to Operating and other expenses.

The Company has recorded AROs related to its non-regulated natural gas storage operations, mineral rights and power generation facilities. The scope and timing of asset retirements related to most of the Company's natural gas pipelines and liquids pipelines is indeterminable. As a result, the Company has not recorded an amount for ARO related to these assets, with the exception of certain abandoned facilities and certain facilities expected to be retired as part of an ongoing modernization program that will improve system integrity and enhance service reliability and flexibility on its Columbia Gas pipeline.

Environmental Liabilities

The Company records liabilities on an undiscounted basis for environmental remediation efforts that are likely to occur and where the cost can be reasonably estimated. These estimates, including associated legal costs, are based on available information using existing technology and enacted laws and regulations. These estimates are subject to revision in future periods based on actual costs incurred or new circumstances. Amounts expected to be recovered from other parties, including insurers, are recorded as an asset separate from the associated liability.

Emission allowances or credits purchased for compliance are recorded on the Consolidated balance sheet at historical cost and expensed when they are utilized. Compliance costs are expensed when incurred. Allowances granted to or internally generated by TransCanada are not attributed a value for accounting purposes. When required, TransCanada accrues emission liabilities on the Consolidated balance sheet upon the generation or sale of power using the best estimate of the amount required to settle the obligation. Allowances and credits not used for compliance are sold and any gain or loss is recorded in Revenues.

Stock Options and Other Compensation Programs

TransCanada's Stock Option Plan permits options for the purchase of common shares to be awarded to certain employees, including officers. Stock options granted are recorded using the fair value method. Under this method, compensation expense is measured at the grant date based on the fair value as calculated using a binomial model and is recognized on a straight-line basis over the vesting period with an offset to Additional paid-in capital. Upon exercise of stock options, amounts originally recorded against Additional paid-in capital are reclassified to Common shares on the Consolidated balance sheet.

The Company has medium-term incentive plans, under which payments are made to eligible employees. The expense related to these incentive plans is accounted for on an accrual basis. Under these plans, benefits vest when certain conditions are met, including the employees' continued employment during a specified period and achievement of specified corporate performance targets.

122  TransCanada Consolidated financial statements 2017

Employee Post-Retirement Benefits

The Company sponsors defined benefit pension plans (DB Plans), defined contribution plans (DC Plans), a savings plan and other post-retirement benefit plans. Contributions made by the Company to the DC Plans and savings plan are expensed in the period in which contributions are made. The cost of the DB Plans and other post-retirement benefits received by employees is actuarially determined using the projected benefit method pro-rated based on service, and management's best estimate of expected plan investment performance, salary escalation, retirement age of employees and expected health care costs.

The DB Plans' assets are measured at fair value at December 31 of each year. The expected return on the DB Plans' assets is determined using market-related values based on a five-year moving average value for all of the DB Plans' assets. Past service costs are amortized over the expected average remaining service life of the employees. Adjustments arising from plan amendments are amortized on a straight-line basis over the average remaining service life of employees active at the date of amendment. The Company recognizes the overfunded or underfunded status of its DB Plans as an asset or liability, respectively, on its Consolidated balance sheet and recognizes changes in that funded status through Other comprehensive income/(loss) (OCI) in the year in which the change occurs. The excess of net actuarial gains or losses over 10 per cent of the greater of the benefit obligation and the market-related value of the DB Plans' assets, if any, is amortized out of Accumulated other comprehensive income/(loss) (AOCI) and into net income over the average remaining service life of the active employees. When the restructuring of a benefit plan gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement.

For certain regulated operations, post-retirement benefit amounts are recoverable through tolls as benefits are funded. The Company records any unrecognized gains or losses or changes in actuarial assumptions related to these post-retirement benefit plans as either regulatory assets or liabilities. The regulatory assets or liabilities are amortized on a straight-line basis over the expected average remaining service life of active employees.

Foreign Currency Transactions and Translation

Foreign currency transactions are those transactions whose terms are denominated in a currency other than the currency of the primary economic environment in which the Company or reporting subsidiary operates. This is referred to as the functional currency. Transactions denominated in foreign currencies are translated into the functional currency using the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency using the rate of exchange in effect at the balance sheet date whereas non-monetary assets and liabilities are translated at the historical rate of exchange in effect on the date of the transaction. Exchange gains and losses resulting from translation of monetary assets and liabilities are recorded in net income except for exchange gains and losses of the foreign currency debt related to Canadian regulated natural gas pipelines, which are deferred until they are refunded or recovered in tolls, as permitted by the NEB.

Gains and losses arising from translation of foreign operations' functional currencies to the Company's Canadian dollar reporting currency are reflected in OCI until the operations are sold, at which time the gains and losses are reclassified to net income. Asset and liability accounts are translated at the period-end exchange rates while revenues, expenses, gains and losses are translated at the exchange rates in effect at the time of the transaction. The Company's U.S. dollar-denominated debt and certain derivative hedging instruments have been designated as a hedge of the net investment in foreign subsidiaries and, as a result, the unrealized foreign exchange gains and losses on the U.S. dollar denominated debt are also reflected in OCI.

Derivative Instruments and Hedging Activities

All derivative instruments are recorded on the Consolidated balance sheet at fair value, unless they qualify for and are designated under a normal purchase and normal sales exemption, or are considered to meet other permitted exemptions.

The Company applies hedge accounting to arrangements that qualify for and are designated for hedge accounting treatment. This includes fair value and cash flow hedges and hedges of foreign currency exposures of net investments in foreign operations. Hedge accounting is discontinued prospectively if the hedging relationship ceases to be effective or the hedging or hedged items cease to exist as a result of maturity, expiry, sale, termination, cancellation or exercise.

TransCanada Consolidated financial statements 2017 123

In a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk and these changes are recognized in net income. Changes in the fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging item, which are also recorded in net income. Changes in the fair value of foreign exchange and interest rate fair value hedges are recorded in Interest income and other and Interest expense, respectively. If hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged item are amortized to net income over the remaining term of the original hedging relationship.

In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative is initially recognized in OCI, while any ineffective portion is recognized in net income in the same financial statement category as the underlying transaction. When hedge accounting is discontinued, the amounts recognized previously in AOCI are reclassified to Revenues, Interest expense and Interest income and other, as appropriate, during the periods when the variability in cash flows of the hedged item affects net income or as the original hedged item settles. Gains and losses on derivatives are reclassified immediately to net income from AOCI when the hedged item is sold or terminated early, or when it becomes probable that the anticipated transaction will not occur.

In hedging the foreign currency exposure of a net investment in a foreign operation, the effective portion of foreign exchange gains and losses on the hedging instruments is recognized in OCI and the ineffective portion is recognized in net income. The amounts recognized previously in AOCI are reclassified to net income in the event the Company reduces its net investment in a foreign operation.

In some cases, derivatives do not meet the specific criteria for hedge accounting treatment. In these instances, the changes in fair value are recorded in net income in the period of change.

The recognition of gains and losses on derivatives for Canadian natural gas regulated pipelines exposures is determined through the regulatory process. Gains and losses arising from changes in the fair value of derivatives accounted for as part of RRA, including those that qualify for hedge accounting treatment, are refunded or recovered through the tolls charged by the Company. As a result, these gains and losses are deferred as Regulatory assets or Regulatory liabilities and are refunded to or collected from the ratepayers, in subsequent years when the derivative settles.

Derivatives embedded in other financial instruments or contracts (host instrument) are recorded as separate derivatives. Embedded derivatives are measured at fair value if their economic characteristics are not clearly and closely related to those of the host instrument, their terms are the same as those of a stand-alone derivative and the total contract is not held for trading or accounted for at fair value. When changes in the fair value of embedded derivatives are measured separately, they are included in net income.

Long-Term Debt Transaction Costs and Issuance Costs

The Company records long-term debt transaction costs and issuance costs as a deduction from the carrying amount of the related debt liability and amortizes these costs using the effective interest method for all costs except those related to the Canadian natural gas regulated pipelines, which continue to be amortized on a straight-line basis in accordance with the provisions of regulatory tolling mechanisms.

Guarantees

Upon issuance, the Company records the fair value of certain guarantees entered into by the Company on behalf of partially owned entity or by partially owned entities for which contingent payments may be made. The fair value of these guarantees is estimated by discounting the cash flows that would be incurred by the Company if letters of credit were used in place of the guarantees as appropriate in the circumstances. Guarantees are recorded as an increase to Equity investments, Plant, property and equipment, or a charge to net income, and a corresponding liability is recorded in Other long-term liabilities. The release from the obligation is recognized either over the term of the guarantee or upon expiration or settlement of the guarantee.

124  TransCanada Consolidated financial statements 2017

3.ACCOUNTING CHANGES

Changes in Accounting Policies for 2017

Inventory

In July 2015, the Financial Accounting Standards Board (FASB) issued new guidance on simplifying the measurement of inventory. The new guidance specifies that an entity should measure inventory within the scope of this guidance at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This new guidance was effective January 1, 2017, was applied prospectively and did not have a material impact on the Company's Consolidated balance sheet.

Derivatives and hedging

In March 2016, the FASB issued new guidance that clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The new guidance requires only an assessment of the four-step decision sequence outlined in GAAP to determine whether the economic characteristics and risks of call or put options are clearly and closely related to the economic characteristics and risks of their debt hosts. This new guidance was effective January 1, 2017, was applied prospectively and has not resulted in any impact on the Company's consolidated financial statements.

Equity method investments

In March 2016, the FASB issued new guidance that simplifies the transition to equity method accounting. The new guidance eliminates the requirement to retroactively apply the equity method of accounting when an increase in ownership interest in an investment qualifies it for equity method accounting. This new guidance was effective January 1, 2017, was applied prospectively and has not resulted in any impact on the Company's consolidated financial statements.

Employee share-based payments

In March 2016, the FASB issued new guidance that simplifies several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance also permits entities to make an accounting policy election either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures when they occur. The Company has elected to account for forfeitures when they occur. This new guidance was effective January 1, 2017 and resulted in a cumulative-effect adjustment of $12 million to retained earnings and the recognition of a deferred tax asset related to employee share-based payments that were made prior to the adoption of this guidance.

Consolidation

In October 2016, the FASB issued new guidance on consolidation relating to VIEs held through related parties that are under common control. The new guidance amends the consolidation requirements such that if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The new guidance was effective January 1, 2017, was applied retrospectively and did not result in any change to the Company's consolidation conclusions.

Future Accounting Changes

Revenue from contracts with customers

In 2014, the FASB issued new guidance on revenue from contracts with customers. The new guidance requires that an entity recognize revenue in accordance with a prescribed model. This model is used to depict the transfer of promised goods or services to customers in an amount that reflects the total consideration to which it expects to be entitled during the term of the contract in exchange for those goods or services. The new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and the related cash flows. The Company will adopt the new guidance on the effective date of January 1, 2018. There are two methods in which the new guidance can be adopted: (1) a full retrospective approach with restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment as of the date of adoption. The Company will adopt the guidance using the modified retrospective approach with the cumulative-effect of the adjustment, if any, recognized at the date of adoption, subject to allowable and elected practical expedients.

TransCanada Consolidated financial statements 2017 125

The Company identified all existing customer contracts that are within the scope of the new guidance by operating segment. The Company has completed its analysis of the contracts and has not identified any material differences in the amount and timing of revenue recognition as a result of implementing the new guidance. Therefore, the Company will not require a cumulative-effect adjustment to opening retained earnings on January 1, 2018.

Although consolidated revenues will not be materially impacted by the new guidance, the Company will be required to add significant disclosures based on the prescribed requirements. These new disclosures will include information regarding the significant judgments used in evaluating when and how revenues, are recognized and information related to contract assets and deferred revenues. In addition, the new guidance requires that the Company’s revenue recognition policy disclosure include additional detail regarding the various performance obligations and the nature, amount, timing and estimates of revenues and cash flows generated from contracts with customers. The Company has developed draft disclosures required in first quarter 2018 with a particular focus on the scope of contracts subject to disclosure of future revenues from remaining performance obligations. The Company has addressed system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance.

Financial instruments

In January 2016, the FASB issued new guidance on the accounting for equity investments and financial liabilities. The new guidance will change the income statement effect of equity investments and the recognition of changes in the fair value of financial liabilities when the fair value option is elected. The new guidance also requires the Company to assess valuation allowances for deferred tax assets related to available for sale debt securities in combination with their other deferred tax assets. This new guidance is effective January 1, 2018 and a method of adoption is specified for each component of the guidance. The Company has completed its analysis and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Leases

In February 2016, the FASB issued new guidance on the accounting for leases. The new guidance amends the definition of a lease requiring the lessor to have both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset in order for an arrangement to qualify as a lease. The new guidance also establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance does not make extensive changes to lessor accounting.

The new guidance is effective January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is continuing to identify and analyze existing lease agreements to determine the effect of application of the new guidance on its consolidated financial statements. The Company is also addressing system and process changes necessary to compile the information to meet the recognition and disclosure requirements of the new guidance and continues to monitor and analyze additional guidance and clarification provided by the FASB.

Measurement of credit losses on financial instruments

In June 2016, the FASB issued new guidance that significantly changes how entities measure credit losses for most financial assets and certain other financial instruments that are not measured at fair value through net income. The new guidance amends the impairment model of financial instruments basing it on expected losses rather than incurred losses. These expected credit losses will be recognized as an allowance rather than a direct write down of the amortized cost basis. The new guidance is effective January 1, 2020 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

Income taxes

In October 2016, the FASB issued new guidance on the income tax effects of intra-entity transfers of assets other than inventory. The new guidance requires the recognition of deferred and current income taxes for an intra-entity asset transfer when the transfer occurs. The new guidance is effective January 1, 2018 and will be applied using a modified retrospective approach. The Company has completed its analysis and does not expect the application of this guidance to have a material impact on its consolidated financial statements.

126  TransCanada Consolidated financial statements 2017

Restricted cash

In November 2016, the FASB issued new guidance on restricted cash and cash equivalents on the statement of cash flows. The new guidance requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents balance, and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and cash equivalents will be included with Cash and cash equivalents when reconciling the beginning of year and end of year total amounts on the statement of cash flows. This new guidance is effective January 1, 2018 and will be applied retrospectively.

Goodwill impairment

In January 2017, the FASB issued new guidance on simplifying the test for goodwill impairment by eliminating Step 2 of the impairment test, which is the requirement to calculate the implied fair value of goodwill to measure the impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance is effective January 1, 2020 and will be applied prospectively, however, early adoption is permitted.

Employee post-retirement benefits

In March 2017, the FASB issued new guidance that will require entities to disaggregate the current service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement. The new guidance also requires that the other components of net benefit cost be presented elsewhere in the income statement and excluded from income from operations if such a subtotal is presented. In addition, the new guidance makes changes to the components of net benefit cost that are eligible for capitalization. Entities must use a retrospective transition method to adopt the requirement for separate presentation in the income statement of the components of net benefit cost, and a prospective transition method to adopt the change to capitalization of benefit costs. This new guidance is effective January 1, 2018. The Company has completed its analysis and does not expect the application of this guidance to have a material impact on its consolidated financial statements.

Amortization on purchased callable debt securities

In March 2017, the FASB issued new guidance that shortens the amortization period for the premium on certain purchased callable debt securities by requiring entities to amortize the premium to the earliest call date. This new guidance is effective January 1, 2019 and will be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this guidance and has not yet determined the effect on its consolidated financial statements.

Hedge accounting

In August 2017, the FASB issued new guidance on hedge accounting, making more financial and non-financial hedging strategies eligible for hedge accounting. The new guidance also amends the presentation requirements relating to the change in fair value of a derivative and additional disclosure requirements include cumulative basis adjustments for fair value hedges and the effect of hedging on individual statement of income line items. This new guidance is effective January 1, 2019, with early adoption permitted. The Company has elected to apply this guidance effective January 1, 2018. The Company has completed its analysis and does not expect the application of this guidance to have a material impact on its consolidated financial statements.

TransCanada Consolidated financial statements 2017 127

4.SEGMENTED INFORMATION

year ended December 31, 2017	Canadian Natural Gas Pipelines		U.S. Natural Gas Pipelines		Mexico Natural Gas Pipelines		Liquids Pipelines		Energy		Corporate1			Total
(millions of Canadian $)
Revenues	3,693		3,584		570		2,009		3,593		—			13,449
Intersegment revenues	—		51		—		—		—		(51	)		—
	3,693		3,635		570		2,009		3,593		(51	)		13,449
Income from equity investments	11		240		(9	)	(3	)	471		63		2	773
Plant operating costs and other	(1,300	)	(1,340	)	(42	)	(623	)	(550	)	(51	)		(3,906	)
Commodity purchases resold	—		—		—		—		(2,382	)	—			(2,382	)
Property taxes	(260	)	(181	)	—		(89	)	(39	)	—			(569	)
Depreciation and amortization	(908	)	(594	)	(93	)	(309	)	(151	)	—			(2,055	)
Goodwill and other asset impairment charges	—		—		—		(1,236	)	(21	)	—			(1,257	)
Gain on assets held for sale/sold	—		—		—		—		631		—			631
Segmented earnings/(losses)	1,236		1,760		426		(251	)	1,552		(39	)		4,684
Interest expense														(2,069	)
Allowance for funds used during construction														507
Interest income and other														184
Income before income taxes														3,306
Income tax recovery														89
Net income														3,395
Net income attributable to non-controlling interests														(238	)
Net income attributable to controlling interests														3,157
Preferred share dividends														(160	)
Net income attributable to common shares														2,997
Capital spending
Capital expenditures	2,106		3,712		833		341		350		41			7,383
Capital projects in development	75		—		—		71		—		—			146
Contributions to equity investments	—		118		1,121		117		325		—			1,681
	2,181		3,830		1,954		529		675		41			9,210

1 The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as revenues in the segment providing the service, as expenses in the segment receiving the service and are eliminated on consolidation within the Corporate segment. Intersegment profit is recognized when the product or service has been provided to third parties.

2 This Income from equity investments relates to foreign exchange gains on the Company's inter-affiliate loan with Sur de Texas. The peso-denominated loan to the Sur de Texas joint venture represents the Company's proportionate share of debt financing for this joint venture. Refer to Note 9, Equity investments, for further information.

128  TransCanada Consolidated financial statements 2017

year ended December 31, 2016	Canadian Natural Gas Pipelines		U.S. Natural Gas Pipelines		Mexico Natural Gas Pipelines		Liquids Pipelines		Energy		Corporate1		Total
(millions of Canadian $)
Revenues	3,682		2,526		378		1,755		4,206		—		12,547
Intersegment revenues	—		56		—		—		—		(56	)	—
	3,682		2,582		378		1,755		4,206		(56	)	12,547
Income from equity investments	12		214		(3	)	(1	)	292		—		514
Plant operating costs and other	(1,245	)	(1,057	)	(43	)	(568	)	(884	)	(64	)	(3,861	)
Commodity purchases resold	—		—		—		—		(2,172	)	—		(2,172	)
Property taxes	(267	)	(120	)	—		(88	)	(80	)	—		(555	)
Depreciation and amortization	(875	)	(425	)	(45	)	(292	)	(302	)	—		(1,939	)
Goodwill and other asset impairment charges	—		—		—		—		(1,388	)	—		(1,388	)
Loss on assets held for sale/sold	—		(4	)	—		—		(829	)	—		(833	)
Segmented earnings/(losses)	1,307		1,190		287		806		(1,157	)	(120	)	2,313
Interest expense													(1,998	)
Allowance for funds used during construction													419
Interest income and other													103
Income before income taxes													837
Income tax expense													(352	)
Net income													485
Net income attributable to non-controlling interests													(252	)
Net income attributable to controlling interests													233
Preferred share dividends													(109	)
Net income attributable to common shares													124
Capital spending
Capital expenditures	1,372		1,517		944		668		473		33		5,007
Capital projects in development	153		—		—		142		—		—		295
Contributions to equity investments	—		5		198		327		235		—		765
	1,525		1,522		1,142		1,137		708		33		6,067

1 The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as revenues in the segment providing the service, as expenses in the segment receiving the service and are eliminated on consolidation within the Corporate segment. Intersegment profit is recognized when the product or service has been provided to third parties.

TransCanada Consolidated financial statements 2017 129

year ended December 31, 2015	Canadian Natural Gas Pipelines		U.S. Natural Gas Pipelines		Mexico Natural Gas Pipelines		Liquids Pipelines		Energy		Corporate1		Total
(millions of Canadian $)
Revenues	3,680		1,444		259		1,879		4,091		—		11,353
Intersegment revenues	—		47		—		—		—		(47	)	—
	3,680		1,491		259		1,879		4,091		(47	)	11,353
Income from equity investments	12		162		5		—		261		—		440
Plant operating costs and other	(1,204	)	(606	)	(51	)	(492	)	(845	)	(105	)	(3,303	)
Commodity purchases resold	—		—		—		—		(2,237	)	—		(2,237	)
Property taxes	(272	)	(77	)	—		(79	)	(89	)	—		(517	)
Depreciation and amortization	(849	)	(248	)	(44	)	(283	)	(341	)	—		(1,765	)
Asset impairment charges	—		—		—		(3,686	)	(59	)	—		(3,745	)
Loss on assets held for sale/sold	—		(125	)	—		—		—		—		(125	)
Segmented earnings/(losses)	1,367		597		169		(2,661	)	781		(152	)	101
Interest expense													(1,370	)
Allowance for funds used during construction													295
Interest income and other													(132	)
Loss before income taxes													(1,106	)
Income tax expense													(34	)
Net loss													(1,140	)
Net income attributable to non-controlling interests													(6	)
Net loss attributable to controlling interests													(1,146	)
Preferred share dividends													(94	)
Net loss attributable to common shares													(1,240	)
Capital spending
Capital expenditures	1,366		534		566		1,012		376		64		3,918
Capital projects in development	230		3		—		278		—		—		511
Contributions to equity investments	—		—		—		311		182		—		493
	1,596		537		566		1,601		558		64		4,922

1 The Company records intersegment sales at contracted rates. For segmented reporting, these transactions are included as revenues in the segment providing the service, as expenses in the segment receiving the service and are eliminated on consolidation within the Corporate segment. Intersegment profit is recognized when the product or service has been provided to third parties.

130  TransCanada Consolidated financial statements 2017

at December 31	2017	2016
(millions of Canadian $)
Total Assets
Canadian Natural Gas Pipelines	16,904	15,816
U.S. Natural Gas Pipelines	35,898	34,422
Mexico Natural Gas Pipelines	5,716	5,013
Liquids Pipelines	15,438	16,896
Energy	8,503	13,169
Corporate	3,642	2,735
	86,101	88,051

Geographic Information

year ended December 31	2017	2016	2015
(millions of Canadian $)
Revenues
Canada – domestic	3,618	3,697	3,930
Canada – export	1,255	1,177	1,292
United States	8,006	7,295	5,872
Mexico	570	378	259
	13,449	12,547	11,353

at December 31	2017	2016
(millions of Canadian $)
Plant, Property and Equipment
Canada	21,632	20,531
United States	30,693	29,414
Mexico	4,952	4,530
	57,277	54,475

TransCanada Consolidated financial statements 2017 131

5.  ACQUISITION OF COLUMBIA

On July 1, 2016, TransCanada acquired 100 per cent ownership of Columbia Pipeline Group, Inc. (Columbia) for a purchase price of US$10.3 billion in cash, based on US$25.50 per share for all of Columbia's outstanding common shares as well as all outstanding restricted and performance stock units. The acquisition was financed through proceeds of approximately $4.4 billion from the sale of subscription receipts, draws on acquisition bridge facilities in the aggregate amount of US$6.9 billion and existing cash on hand. The sale of the subscription receipts was completed on April 1, 2016 through a public offering and, upon closing of the acquisition, were exchanged into approximately 96.6 million common shares of TransCanada. Refer to Note 17, Long-term debt and Note 20, Common shares for further information on the acquisition bridge facilities and the subscription receipts, respectively.

At the date of acquisition, Columbia operated a portfolio of approximately 24,500 km (15,200 miles) of regulated natural gas pipelines, 285 Bcf of natural gas storage facilities and midstream and other assets in various regions in the U.S. TransCanada acquired Columbia to expand the Company’s natural gas business in the U.S. market, positioning the Company for additional long-term growth opportunities.

The goodwill arising from the acquisition principally reflects the opportunities to expand the Company’s U.S. Natural Gas Pipelines segment and to gain a stronger competitive position in the North American natural gas business. The goodwill resulting from the acquisition is not deductible for income tax purposes. The acquisition was accounted for as a business combination using the acquisition method where the acquired tangible and intangible assets and assumed liabilities were recorded at their estimated fair values at the date of acquisition. The purchase price equation reflects management’s estimate of the fair value of Columbia’s assets and liabilities as at July 1, 2016.

	July 1, 2016
(millions of $)	U.S.		Canadian1
Purchase Price Consideration	10,294		13,392
Fair Value
Current assets	658		856
Plant, property and equipment	7,560		9,835
Equity investments	441		574
Regulatory assets	190		248
Intangible and other assets	135		175
Current liabilities	(597	)	(777	)
Regulatory liabilities	(294	)	(383	)
Other long-term liabilities	(144	)	(187	)
Deferred income tax liabilities	(1,613	)	(2,098	)
Long-term debt	(2,981	)	(3,878	)
Non-controlling interests	(808	)	(1,051	)
Fair Value of Net Assets Acquired	2,547		3,314
Goodwill (Note 11)	7,747		10,078

1 At July 1, 2016 exchange rate of $1.30.

The fair values of current assets including cash and cash equivalents, accounts receivable, and inventories and the fair values of current liabilities including notes payable and accrued interest approximated their carrying values due to the short-term nature of these items. Certain acquisition-related working capital items resulted in an adjustment to accounts payable.

Columbia’s natural gas pipelines are subject to FERC regulations and, as a result, their rate bases are expected to be recovered with a reasonable rate of return over the life of the assets. These assets, as well as related regulatory assets and liabilities, had fair values equal to their carrying values on acquisition. The fair value of mineral rights included in Columbia's plant, property and equipment was determined using a discounted cash flow approach which resulted in a fair value increase of $241 million (US$185 million). On acquisition date, the fair value of base gas included in Columbia’s plant, property and equipment was determined by using a quoted market price multiplied by the estimated volume of base gas in place which resulted in a fair value increase of $840 million (US$646 million).

132  TransCanada